Few things are more frustrating for a seller than reaching escrow — and then hearing that the buyer wants out. You’ve already made plans, packed boxes, maybe even put an offer on another home. So what happens next when a buyer backs out of escrow in California?
This guide explains your rights, what to do immediately, and how to protect yourself from this happening again.
Related: Learn how to protect your deal from falling apart when selling as-is in our full guide: 2025 Guide to Selling a House As-Is in California.
What “Backing Out of Escrow” Really Means
When you and the buyer sign a purchase agreement, you enter escrow — the phase where funds, inspections, and contingencies are processed before closing.
If the buyer “backs out,” it means they’ve chosen to cancel the contract before closing, which can happen for legitimate or improper reasons depending on the contract terms.
In California, the Residential Purchase Agreement (RPA) governs this process and outlines exactly when and how a buyer can legally cancel without penalty.
Common Reasons Buyers Back Out of Escrow
1. Failed Home Inspection
If the inspection reveals major issues — like foundation cracks, roof damage, or mold — the buyer may decide the home isn’t worth the risk.
Most contracts include an inspection contingency, allowing buyers to withdraw without losing their deposit.
🛠️ Tip: To avoid this, consider ordering a pre-listing inspection so surprises don’t derail your sale later.
2. Financing Falls Through
Even pre-approved buyers can lose financing. Job loss, credit changes, or stricter lender requirements can cause a loan denial mid-escrow.
If the contract includes a loan contingency, the buyer can back out legally if they can’t secure funding.
3. Low Appraisal
If the property appraises below the purchase price, the lender may not issue a loan unless the buyer pays the difference in cash — something many can’t afford.
Buyers often use the appraisal contingency to renegotiate or walk away.
📊 Read more about what happens when a house doesn’t appraise in our guide: What Happens if Your House Doesn’t Appraise in California.
4. Cold Feet or Buyer’s Remorse
Sometimes buyers simply get nervous — especially first-timers. Though emotional backing out isn’t a legal contingency, they might try to find another reason within their contract to justify canceling.
5. Title or Legal Issues
If title searches uncover liens, unknown heirs, or boundary disputes, a buyer can legally delay or cancel the sale. This is why resolving title issues early is so important.
What to Do Immediately If a Buyer Backs Out
Step 1: Review the Purchase Contract
Your first step is to reread the purchase agreement and escrow instructions. Look for:
- Which contingencies apply
- Whether deadlines were met
- What happens to the buyer’s earnest money deposit (EMD)
In most California contracts, the EMD is 1–3% of the purchase price and is held in escrow as a good-faith deposit.
Step 2: Determine Whether the Buyer Is in Default
If the buyer cancels after removing contingencies or misses a contractual deadline, they could be in default.
In that case, you may be entitled to retain their deposit as liquidated damages.
The California Association of Realtors (C.A.R.) provides detailed legal guidance on liquidated damages clauses in the standard RPA form.
Step 3: Contact Your Escrow Officer
The escrow company cannot release the earnest money without mutual written instructions from both parties.
If the buyer disputes forfeiting the deposit, the funds remain frozen until both sides agree — or a court decides.
If necessary, your real estate attorney can send a demand letter to the buyer or file a small claims case for up to $10,000.
Step 4: Decide Whether to Re-List or Pursue Damages
If you don’t want to go through legal steps, re-listing the home is often the fastest route.
However, if the cancellation caused measurable losses (like double mortgage payments or missed purchases), you can consult an attorney about pursuing damages.
How to Protect Yourself Next Time
1. Require Stronger Earnest Money Deposits
Buyers with more money at stake are less likely to walk away.
Ask for at least 3% of the purchase price in escrow, which is the maximum enforceable amount under California law for liquidated damages.
2. Shorten Contingency Timelines
Inspection and loan contingencies are usually 17 days by default. You can shorten them to 10 days to reduce the time a buyer can back out.
Once contingencies expire, the buyer must remove them in writing — locking in their commitment.
3. Verify Proof of Funds Early
Before accepting an offer, ask for bank statements or lender pre-approval letters to confirm the buyer’s ability to perform.
Legitimate buyers won’t hesitate to show documentation.
💡 For more on verifying buyer legitimacy, see our related post: Scams to Watch Out for When Talking to a “Cash Buyer.”
4. Work With Cash Buyers You Can Trust
Cash buyers are often the most reliable option because they don’t depend on financing or appraisals.
With a reputable investor, you can close in as little as 7–14 days — even if your previous deal fell through.
When You Might Need Legal Help
You should consult a real estate attorney if:
- The buyer refuses to release the deposit.
- You suspect bad faith or fraud.
- The buyer’s default caused significant financial harm.
An attorney can assess whether litigation is worth pursuing or if a settlement is more practical.
Example Scenario: How One Seller Recovered After a Buyer Backed Out
A Pasadena homeowner accepted an offer from a financed buyer who later failed their loan approval. The home sat off the market for 45 days, costing the seller over $3,500 in mortgage payments.
Instead of re-listing traditionally, she sold directly to a cash buyer — closing in nine days. The speed and certainty outweighed the slightly lower offer, and she avoided another failed escrow.
Key Takeaways
- Always review contingencies carefully before signing.
- Buyers can legally back out for inspections, financing, or appraisal issues — but not after contingencies expire.
- You may be entitled to retain their earnest money if they default.
- Work with verified buyers and shorter timelines to reduce risks.
- Consider a cash buyer for faster, stress-free closing if your deal falls through.
Final Thoughts
When a buyer backs out of escrow in California, it’s stressful — but it doesn’t have to derail your sale.
Understanding your rights, acting quickly, and working with trusted professionals can help you recover fast.
At Mrs. Property Solutions, we’ve helped many homeowners pick up the pieces after failed escrows by providing guaranteed, all-cash offers and quick closings.
👉 Need to sell your house fast after a buyer backed out?
Visit Mrs. Property Solutions or call (602) 376-8391 for a fair, no-obligation cash offer today.